Is It All About Who You Know? Prior Work Connections and Entrepreneurial Success

Abstract

This paper studies how prior professional connections among founding employees predict a new firm's short and medium term success. We apply three employment network measures to a large employer-employee matched Brazilian panel dataset, to find that network structures are strongly predictive of both firm survival and growth, even when controlling for a wide host of human capital, firm, and sectoral characteristics. All else equal, new firms with previously connected founding members experience higher survival odds but slower early growth. These results suggest that working with former co-workers -- with whom informational asymmetries are presumably resolved -- increases compatibility and resource sharing, qualities which are vital to new firm survival. Firm growth, on the other hand, appears to benefit from a more diverse resource set, which is facilitated by drawing on individuals from a variety of backgrounds. Results are consistent across most sectors, initial firm sizes, and other sample selection criteria.

Keywords: Entrepreneurship; employee networks; firm performance; founding teams

JEL Classification: L26, L14, L25, J21